The Loanable Funds Market and Crowding Out- Macro Topic 4.7

Mr. Clifford discusses key macroeconomic concepts, focusing on the loanable funds market. He explains how the demand and supply for loans determine the real interest rate, and how high or low interest rates affect borrowing and lending. The video also covers deficit spending, where government borrowing increases demand for loans, raising interest rates. This leads to the crowding out effect, where higher interest rates reduce private investment, potentially hindering economic growth despite government efforts to stimulate the economy.

What happens to the demand for loans when the interest rate is very high?

• Demand remains unchanged.

• Demand fluctuates randomly.

• Demand decreases significantly.

• Demand increases significantly.

How does the government cover the difference when its expenditures exceed its tax revenue?

• By borrowing in the loanable funds market.

• By reducing public services.

• By increasing taxes.

• By printing more money.

What is the effect of increased government borrowing on the real interest rate?

• It increases the real interest rate.

• It decreases the real interest rate.

• It has no effect on the real interest rate.

• It stabilizes the real interest rate.

What is the term used to describe the reduction in private investment due to increased government borrowing?

• Deflation

• Inflation

• Stagflation

• Crowding out

Why might a government choose to run a deficit during a recession?

• To reduce inflation.

• To decrease the national debt.

• To close a recessionary gap through fiscal policy.

• To increase public savings.